From time to time, I get questions about banking for business, and I thought for today’s newsletter, I’d share some of the more common ones. Banking isn’t something I spend much time on in my business, but there are a few things worth thinking about on the topic.
What’s the best bank to use for business?
Trick question- there is no one best bank, of course. That said, there are better and worse choices. My first suggestion is don’t use a credit union for business. They are not set up for this; generally can’t help if you need anything more than a checking account, and often have much worse statements and online banking than a regular bank. You may have your personal bank accounts there, that’s fine, but I don’t recommend using them for business banking- it’s not what they do, and that just makes it all harder.
If you run a retail business where you need to go in and make actual deposits and get change, obviously, find someone local.
If you have an online business and/or don’t live somewhere close to a branch, then Mercury is a great online banking option- they make it very easy.
I generally recommend Chase as a good business bank with low fees and a national presence. We have a lot of clients that use them, and I rarely hear complaints. It is also good to get to know the top person at the local branch if you ever need help with fraud, a line of credit, or anything else- having a real person’s name to contact makes things go a lot faster than just trying to meet someone the first time when you’re in a bind. You can’t do this with the online banks.
So there is no best bank, but I’d say pick a bigger bank that has low fees and is business-friendly, where there is a person you can connect with if you ever need something. Avoid credit unions, tiny local only banks, and US Bank (US Bank is just the worst. I used to bank there but never again. And I know a lot of other people who feel the same way. Your experience may vary, but my opinion won’t change, haha!).
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How many accounts should I have?
I am a big believer in simplicity. I run my business with one checking account. That way, I only have one place and one balance to look at when I want to know where I’m at.
Some people have more, sometimes one for payroll, or one for taxes, or one for deposits, and a different one for expenses. In my view, all this means is you have to spend time and attention moving money around and risking overdrafts, but with no added benefit.
There are some cases where you simply have to have an additional account (like for Trust accounting), but unless it’s required, I don’t recommend it.
If you want to add a savings account (and some banks require one), then you can and hold some money you don’t need there. But I’ve seen clients come in with ten or twelve bank accounts, all holding some balance, but usually most are small, and they themselves get confused about why they have so many or what they are doing with them. If you can’t give a logical and benefit-driven reason for adding an account, my suggestion is to not do it!
How much should I keep in the bank?
Since checking accounts pay virtually no interest, you’re better off not keeping more in your main account than you need to run the business. That means, keep enough in so that in your normal ebb and flow of operations, you never go below zero, but you’re not keeping more cushion than you need. I’ve seen clients who routinely keep balances of over $1M in their checking accounts, and the balance never dips below $850K- meaning they have over $800K of money sitting there uselessly. They could, at minimum, have it in a high-yield money market account and earn 4% on that cash- an extra $32,000 for doing nothing other than taking a few minutes to make a transfer!
If you’re not sure how much to keep on hand, just review your last three months’ bank statements and see what the lowest balance was. Take into account any upcoming big expenses or any seasonality in the business, but in general, it should be pretty easy to see if you’re holding more cash than you need in the account. If so, move some to a higher-yielding account. You can always move it right back if you need it, but don’t let it just sit if you don’t!
Should I worry about FDIC limits?
Some people have multiple accounts because they worry if the bank fails, they won’t be totally covered. If you read the point above, then that’s one way to avoid having too much in one bank. Another consideration is not keeping your business checking account at a small institution or one that may, in fact, collapse. But I also think at the end of the day, if the US banking system all falls apart, then spreading your money across a few different banks won’t be enough anyway, because at that point, everything will be so bad that your bank balance won’t even be on your top ten list of things to worry about. So in my view, FDIC considerations aren’t something to make business banking decisions around.
Will the bank give me a loan?
Yes, but only if you don’t need one! Well, kind of joking but kind of not. I get offers to borrow money all the time, but I don’t need to borrow, so I ignore them. If I was in a position where cash was tight and I needed a loan, I am 100% sure those offers would dry up very quickly.
Banks aren’t around to help; they are around to make money, so anyone who looks like they need money seems risky- banks want to lend to people who will have no problem at all paying it all back with interest.
If you have a good relationship with a business bank, and at least two years of history, and you don’t have any overdrafts, and they can see you get lots of regular monthly deposits, they’ll be happy to chat with you about their lending options. If you’re new, not getting enough deposits to cover withdrawals (aside from what you personally transfer in or deposit), or have overdrafts, they aren’t going to consider you for a loan.
So the best time to get a line of credit set up is when things look good, and you don’t need it. If you wait until you need it, chances are you won’t qualify.
My bank offers merchant accounts, should I use that?
Usually, no, there are typically better rates with more flexible usage, lower fees, and better integration from merchant processing specialists (who your bank may be white-labeling anyway) rather than using your bank. This isn’t an always or never situation, but for sure, shop around rather than just take the convenience of using the bank’s option, because that can end up costing you a ton over time.
My bank offers payroll, should I do payroll with them?
Same as above, they don’t really offer payroll, they just have a referral relationship with a payroll company, often one of the legacy companies like ADP or Paychex, who charge way more than some of the newer firms, and never stop trying to sell you add-ons. It’s easy to do, but generally costs more and offers worse results than finding it on your own.